New Clarity on Worker Classification

Determining worker classification (employee vs. independent contractor) is one of the most misunderstood topics in the household employment industry. Rarely a week goes by without us getting a call from a family who’s dealing with an expensive mistake caused by a misunderstanding about worker classification. It’s usually a variation of one of the misconceptions below:

Misconception #1. Worker classification is a matter of choice. “I’d like to give my caregiver a 1099 because it seems easier than a W-2.”

Misconception #2. Part-time workers are not employees. “If she only works for me part-time, then she’s more of a free agent and, therefore, an independent contractor.”

Misconception #3. It’s okay if she agrees to it. “I put it in our contract and she perfectly fine with it, so that makes it legal.”

Misconception #4. Control vs. the right to control. “I don’t watch over her and tell her what to do, so I don’t control her work.”

Many commercial employers struggle with the concept of worker classification, so it’s not surprising that busy families (who don’t do this for a living) might need help in this area. Part of the confusion certainly rests with the IRS test of control, which most lay people would probably argue is ambiguous to the point that reasonable people could easily reach different conclusions.

To provide clarity, the Department of Labor recently weighed in on this topic and provided some additional guidance – new factors to help employers distinguish between an employee and an independent contractor. If it wasn’t already obvious that the IRS and DOL would like to drastically reduce the number of independent contractors in order to create a level playing field for employers, the new guidance should make it abundantly clear.

The new DOL guidance focused on six new factors, but two of them really stood out for domestic workers — economic dependence and permanence. Read more on CPA Practice Advisor.